Runway Incubator | The Innovation Blog

The Ongoing Relationship Between Founders & Investors

Posted by Joe Vasquez on Feb 16, 2016 8:30:52 PM

I’ve been reading a lot about startups needing to cut down on burn this year as a result of downward pressure on follow-on financing rounds. When a market is entering into a bear cycle, there’s always an increased focus on costs as cash becomes more scarce. This one is no exception.

 

Most venture funded companies are run with the expectation that their burn will far exceed their income. In many cases, there is no revenue prior to equity financing rounds. What the return investors are looking for isn’t from debt repayments or dividends. The goal is to pump up a startup with cash so that it can punch far above its weight class in terms of product development, hiring, and customer acquisition, all with the goal of capturing market opportunities that would ordinarily be too expensive, risky or slow for organic models. This is the nature of the game that’s being played and investors are hoping to win at it and sell their equity positions at a large premium down the line.

 

When investors give advice to entrepreneurs to survive a bear market, it always comes across condescendingly simple and something along the lines of, “Behave more like a real business.” I always wince every time I read this. It sounds like parents telling their teenage children to grow up and act more like an adult. The truth is, investors still need startup founders to think like venture funded companies, or else they won’t be able to realize those outsized returns which are the whole point of investing in the first place. And to realize those outsized returns, you need to spend money at a more aggressive level that would be sustainable for a traditional business. This is why investors put in capital in the first place, for the founders to spend it, not for founders to put it in some bank account as a rainy day fund. So the message should really be, “Hey, what we’re asking you to do just got harder because we as an investor community won’t be able to support you at the same level as we have before. But yeah, we still need you to hit those unreasonable targets so we can exit on time.”   

 

Ultimately, founders do need to tighten their belts and focus on conserving cash as best as possible. And as always, the focus should be on hitting core KPIs with every dollar spent. But maybe this bear cycle we could see more op-eds from the investor community apologizing for setting funding valuations too high, pressuring founders to take more money than they needed and for setting unrealistic expectations for the availability of follow-on capital. Maybe that’s too much to expect, and maybe it’s obnoxiously paternalistic in its own right. But it sure would beat another article on how founders need to grow up and learn to spend money like an “adult” company.  

Joe Vasquez

Written by Joe Vasquez

Joe has a passion for helping entrepreneurs and corporations to innovate. He was an early co-founder of StartX, an accelerator for Stanford entrepreneurs. Prior to joining Runway, Joe taught at the Kauffman Fellows Academy and was a Data Analyst Fellow at LocoMotive Labs. Joe started his career in investment banking at Goldman Sachs and spent two years teaching bilingual math with Teach For America. Joe holds a BS in Atmosphere & Energy Engineering from Stanford University.

Topics: Business